Part of Guinness's Dublin brewery to close

The home of Guinness for the past 250 years got a reprieve yesterday when Diageo said it would continue to brew the black stuff in Dublin. But the drinks group will close half its famous brewery as part of a £520m modernisation plan that will cost hundreds of jobs.

After a year of uncertainty, the drinks group announced yesterday that it plans to build a new factory on the outskirts of Dublin. Two smaller breweries, in Kilkenny and Dundalk, will close, as will 50% of the St James's Gate site. The rest of the plant will be revamped. The brewery will continue to produce the popular stout for sale in Ireland and Britain.

Paul Walsh, Diageo's chief executive, said that the plan reaffirmed the group's commitment to Guinness and to its "spiritual home" in Dublin.

He said: "We will rejuvenate St James's Gate and also build a world class, state-of-the-art brewery."

Diageo began a review of its facilities across Ireland last June. This led to speculation that the home of Guinness could be closed, with the land sold for as much as £2bn. Walsh denied that it would have made more financial sense to sell off the entire site, where Arthur Guinness began brewing in 1759.

Walsh said: "If you look at Dublin and St James's Gate, they are very important in the eyes of a great number of our consumers ... and we've listened to that."

Ireland's top tourist attraction, the Guinness Storehouse, the museum at St James's Gate, will remain open. The company expects to raise £400m by selling off about half the existing Dublin facility, along with the Kilkenny and Dundalk sites. About 90 staff will be made redundant at Kilkenny, and 85 at Dundalk. Diageo's total workforce will shrink by 250 once the changes have been completed in 2013.

Building the new Dublin factory is expected to cost £520m. It is scheduled to open in 2013 and will brew Guinness for international markets such as Africa, where demand is soaring.

Last year, Nigeria overtook Ireland in the consumption of Guinness, making it the second-largest market after the UK.